Tuesday, December 23, 2008

FIPB Overrules Press Note 1 Objections

Press Note 1 of 2005 issued by the Department of Industrial Policy & Promotion (DIPP) requires foreign companies to obtain the prior permission of the Foreign Investment Promotion Board (and thereby making the automatic route for investment inapplicable) if they had a joint venture with another Indian partner in the same field. This condition is applicable for joint ventures existing in January 2005 (when the press note was issued). Due to Press Note 1, the FIPB in practice requires applicants (being the foreign investors) to support their applications with a no-objection letter from their previous Indian joint venture partner, thereby conferring significant de facto powers to such Indian partner.

As we had discussed earlier, there is considerable pressure for Press Note 1 to be removed altogether, or at least its effects diluted. In the meanwhile, in a proposal by Ralf Schneider to set up a wholly owned subsidiary in India, the FIPB has engaged in a rare move overruling the objections of the previous Indian joint venture partner, Larsen & Toubro Limited (L&T). This would allow Ralf Schneider to proceed with its new Indian venture without having to obtain the no-objection of L&T. Details of this case are available in a report in the Business Standard.

(Update: The Business Standard link does not appear to be working, and hence the report is extracted below:

“The Foreign Investment Promotion Board (FIPB) has cleared a proposal by German plastic moulding major Ralf Schneider to set up a wholly-owned subsidiary in India, setting aside objections raised by its former Indian partner Larsen & Toubro (L&T) under Press Note 1 of the Foreign Direct Investment (FDI) policy.

This is the second time the FIPB has struck down Press Note 1 objections from an Indian partner, the first being in October 2006 when FIPB cleared a proposal by the US-based Guardian group over objections from the VK Modi group of Gujarat Guardian.

Press Note 1 is a guideline that requires foreign companies with joint ventures or technical partnerships in India to obtain a “no-objection certificate” from their Indian partners if they propose to set up the same or a similar line of business in India.

It has been the source of tension between several Indian companies and their foreign partners, a prominent example being French foods major Groupe Danone’s attempt to get a no-objection certificate from the Wadia group, with which it has an equity tie-up in Britannia, for fresh investments in India.

Ralf Schneider had tied up with engineering giant L&T in 1992 for a technical partnership that expired in 2007. A few months ago, L&T invoked Press Note 1 blocking Ralf Schneider’s entry on grounds that the German company’s plans would hurt the Indian company.

L&T had argued that one of its business units makes the same equipment that Ralf Schneider intends to make in India. Sources added that the company thought the German firm’s entry would create confusion in the market with two producers offering the same product using the same technology.

Ralf Schneider had countered L&T’s argument saying Press Note 1 should not be applicable in this case since the tie-up was a technical one and not a financial one and that it had expired last year.

FIPB had initially agreed that the proposal attracted Press Note 1. Later, it set up a committee to discuss the issue with the two former partners.

An L&T spokesperson declined to comment on the FIPB order.”)

6 comments:

SM said...

Hi,

The Business Standard link does not appear to be working - can you post the details on the blog itself?

Umakanth V said...

Thanks SM. The report has now been extracted.

Ms. U said...

This comment is in the context of your observation - 'This is the second time the FIPB has struck down Press Note 1 objections from an Indian partner, the first being in October 2006 when FIPB cleared a proposal by the US-based Guardian group over objections from the VK Modi group of Gujarat Guardian" -

Although the FIPB did indeed grant the approval to Guardian to set up a wholly owned subsidiary, however it would not be correct to assume that they have disregarded the requirements of Press Note 1 (2005 Series).

The approval expects the foreign investor to continue to observe its commitments to the existing joint venture and thereby ensured that the new investment cannot be at the cost of / detrimental to the existing joint venture.

Clearly, the restrictions imposed on the foreign investor by the FIPB, go to show that the protectionist attitude of the FIPB towards Indian Promoters has remained firm.

Curiously, despite the approval of 2006, even at the end of 2009 this approval is yet to be acted upon by the foreign investor.

Anonymous said...

Hi Umakanth,

Was wondering how the plea raised by Ralf Schneider helps their cause.

"Ralf Schneider had countered L&T’s argument saying Press Note 1 should not be applicable in this case since the tie-up was a technical one and not a financial one"


Can't technology related joint ventures be seen as being seen as a relationship between 'technology partners' which is covered under PN 1 of 2005?

Also, would a contractual JV fall under the purview of PN 1 of 2005?

Umakanth V. said...

@Anonymous. It is not clear whether FIPB overruled the Indian partner's objection on that very ground raised by Ralf Schneider. In any case, Press Note 1 of 2005 applies to "existing joint venture or technology transfer / trademark agreement in the same field". This is a fairly wide expression and is capable of including technology collaborations and contractual joint ventures; not just investment or financial collaborations.

Anonymous said...

Thanks Umakanth. Clears things up.